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Int. J.

Production Economics 133 (2011) 154163

Contents lists available at ScienceDirect

Int. J. Production Economics


journal homepage: www.elsevier.com/locate/ijpe

The impact of lean practices on inventory turnover


Krisztina Demeter, Zsolt Matyusz 
m ter 8, Budapest H-1093, Hungary
Corvinus University of Budapest, Department of Logistics and Supply Chain Management, F
ova

a r t i c l e in f o

a b s t r a c t

Article history:
Received 30 September 2008
Accepted 22 October 2009
Available online 1 February 2010

Lean manufacturing (LM) is currently enjoying its second heyday. Companies in several industries are
implementing lean practices to keep pace with the competition and achieve better results. In this
article, we will concentrate on how companies can improve their inventory turnover performance
through the use of lean practices. According to our main proposition, rms that widely apply lean
practices have higher inventory turnover than those that do not rely on LM. However, there may be
signicant differences in inventory turnover even among lean manufacturers depending on their
contingencies. Therefore, we also investigate how various contingency factors (production systems,
order types, product types) inuence the inventory turnover of lean manufacturers. We use cluster and
correlation analysis to separate manufacturers based on the extent of their leanness and to examine the
effect of contingencies. We acquired the data from the International Manufacturing Strategy Survey
(IMSS) in ISIC sectors 2835.
& 2010 Elsevier B.V. All rights reserved.

Keywords:
Lean
Manufacturing practices
Inventory management

1. Introduction
Every company has to invest in manufacturing management
programs, methods and technologies in order to remain competitive. One very popular investment choice nowadays is lean
production (LP), which consists of several manufacturing practices, including process focus, pull production, quality development, total productive maintenance, continuous improvement,
worker empowerment, supplier development, and so on. The
main objective of LP is to satisfy customer needs on the highest
possible level through the elimination of waste. Some sources of
waste are overproduction, faulty products, sub-optimized processes, unnecessary waiting, movement or transportation, and
excess inventory.
However, if this is true, and several kinds of waste can be
reduced, why does every company not implement LP, and why do
some fail during the implementation process? In the early
literature, researchers blamed various conditions: for example,
excessive demand uctuation, a high level of product variation, or
low demand that therefore cannot justify a line production
system or cellular manufacturing. A few years later, however, we
read about successful lean manufacturing program implementation at companies and industries that were far from satisfying
these conditions (e.g., health care, Fillingham, 2007). As a result,
the question arises of whether LP can be successful under any

 Corresponding author.

E-mail addresses: krisztina.demeter@uni-corvinus.hu (K. Demeter),


zsolt.matyusz@uni-corvinus.hu (Z. Matyusz).
0925-5273/$ - see front matter & 2010 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2009.10.031

circumstances and what results can be achieved if the circumstances are not ideal.
In this paper, we investigate how various contingency factors
inuence inventory turnover performance, a very important
indicator of the success of LP in companies applying lean practices
(see e.g., Huson and Nanda, 1995). For this purpose, we formulate
the following research questions:

 How do lean practices affect rm inventory levels?


 How do certain contingency factors (production systems, order
types and product types) inuence corporate inventories
within an LP environment?
The structure of the paper is as follows. First, we review the LP
literature, including works on inventory performance and contingency issues, to form a basis for our propositions. Then we
introduce our methodology and the survey. After our data
analysis, the results are discussed and some conclusions are
drawn.

2. Literature review
2.1. Lean production in general
LP originated from the Toyota production system (TPS) and
gained ground as a best-practice manufacturing strategy and
repository of increasing competitiveness in recent decades (Voss,
1995). The best evidence of this phenomenon is the increase in

K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

the number of lean transformations all over the world in the


preceding 1015 years (Bruun and Mefford, 2003).
It is extremely difcult, however, to determine what LP stands
for. Unfortunately, denitions are rather vague and confused, with
several elements and sub-elements put forth in various papers.
Even in standard OM textbooks, one can nd only denitions such
as [lean production is] an integrated set of activities designed to
achieve high-volume production using minimal inventories of
raw materials, work-in-process, and nished goods (Lewis, 2000;
Chase et al., 2006). The rst publication using the term (Womack
et al, 1990) explained lean production simply as a journey leading
to the use of fewer resources.
The confusion around lean production arises from several
sources: (a) the Toyota production system itself, which has
undergone tremendous improvement during its lean journey over
the last 40 years (Spear, 2004; Voss, 2007); (b) the fact that
several companies consider themselves lean, even if they are at
very different stages of development; (c) the fact that researchers
use various denitions for the term, such that there is no common
understanding (Hines et al, 2004); and (d) the introduction of
another book by Womack and Jones (1996) entitled Lean
thinking, which describes the principles of LP and opens new
areas for leanness, thus leading to further lack of clarity. From that
book on, it became evident that LP exists at both strategic and
operational levels (Hines et al, 2004). At the strategic level, the
concept helps one to understand customer value and identify the
value stream. At the operational level, it is a bundle of practices
and tools that lead to the elimination of waste and force
continuous improvement. It is the latter that is relevant to the
goals of this paper.
According to Karlsson and Ahlstrom (1996), LP permeates an
entire organization (Fig. 1). It consists of lean development, lean
procurement, lean manufacturing (LM) and lean distribution. This
shows that the proper utilization of LP affects the whole rm.
However, LP is not only a set of practices connected to the valuecreation process. Rather, LP constitutes the pursuit of excellence
based on a mixture of performance, continuous improvement and
organizational change (De Toni and Tonchia, 1994).
Empirical evidence supports the idea that LP partially explains
high corporate performance. For example, the British auto
components industry increased its stock turn ratio by 177.4%
between 1992 and 1994 (Oliver et al., 1996). Indeed, early
implementation was seen in the automotive and electronics
industries (Crawford et al., 1988). Nevertheless, LP as a whole

155

seems to be universal, even if there are industrial barriers to the


transfer of certain elements. For example, in the healthcare
industry, LP can be applied easily in theory, but the special
circumstances that characterize that industry (e.g., the simple fact
that one has to work with patients rather than lifeless material)
make its proper application more difcult. This indicates that
there is no single good solution to achieving higher performance,
and that the context of operations is of the utmost importance,
but that LP can at least be applied to a certain extent in several
industries (Lowe et al., 1997; Shah and Ward, 2003).
We analyzed data from an international manufacturing survey
that also contained questions from other corporate functions, but
wherein manufacturing was in the focus. On this basis, we
concentrated our subsequent efforts only on the LM part of lean
production. This decision was also supported by the fact that
manufacturing is the function whereby leanness is usually
introduced to a company. Therefore, if one is looking for
candidates for lean adaptation, one must look at the rst area of
LP implementationthat is, manufacturing.
Karlsson and Ahlstrom (1996) enumerate the following
building blocks of LM: elimination of waste, continuous improvement, multifunctional teams, zero defects/JIT, vertical information
systems, decentralized responsibilities/integrated functions, pull
versus push (see Fig. 1).
As the goals of LM are realized through the implementation of
several lean practices, we will investigate them more closely in
the following section.
2.2. Lean practices
There are numerous practices that can be applied under LM.
This is one reason why one nds rather different individual
practices investigated in the relevant literature, though the focus
on LM is the same (e.g., see Sohal and Egglestone, 1994; Oliver
et al., 1996; White et al., 1999). A better approach is to create
bundles of practices that show the multi-faceted nature of LM.
There have been several classications of bundles put forth by
previous literature. For example, Lowe et al. (1997) differentiate
between three bundles of practices: factory practices (related to
the minimization of buffers), human resource management
(HRM) practices (concerning the encouragement of high commitment and motivation among the workforce) and work systems
(related to teamwork and the development and application of
employee knowledge and skills on the shop oor). On the other

Fig. 1. Elements of lean production (KarlssonAhlstrom, 1996).

156

K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

hand, Sakakibara et al. (1997) describe infrastructure practices


(quality management, workforce management, manufacturing
strategy, organizational characteristics, product design) and JIT
practices (set-up time reduction, schedule exibility, maintenance, equipment layout, kanban and JIT supplier relationships).
Dal Pont et al. (2008)identify three bundles; namely JIT (with
items such as JIT delivery, frequent supplier delivery, kanban pull
systems, small lot sizes, and so on), TQM (with items like
statistical process control, poka yoke, equipment problemsolving, and so on) and HRM (with items such as employee
encouragement, multiple task training, at organization structure,
and so on).
In the following, we will use the classication developed by
Shah and Ward (2003), which lists four different bundles; namely,
JIT, total quality management (TQM), total productive maintenance (TPM) and human resource management (HRM). We
chose this classication because we believe that it encompasses
the various aspects of LM in the most comprehensive way. What
are the relationships among these four elements?
TQM, JIT and TPM have similar fundamental goals: continuous
improvement and waste reduction. Together, they are a comprehensive set of manufacturing practices directed towards improving performance. Two major forms of waste can be addressed by
JIT through the associated practices: work-in-process inventory
and unnecessary delays in ow time. TPM helps to maximize
equipment effectiveness throughout its entire life, and TQM is
aimed at continuously improving and sustaining quality products
and processes (Cua et al., 2001). TQM and TPM are the two pillars
that support JIT production systems, but it is often hard to clearly
separate their effect on manufacturing performance, which
indicates that perhaps TQM and TPM are strongly interrelated
(Imai, 1998; McKone et al., 2001).
Sriparavastu and Gupta (1997) investigated the implementation of JIT and TQM principles in US manufacturing rms. They
found that the joint application of JIT and TQM increased quality
standards and productivity more than either JIT or TQM alone.
According to Cua et al. (2001) simultaneous implementation of
TQM, JIT and TPM will result in higher performance than will the
implementation of practices from only one of TQM, TPM and JIT.
The fourth bundle, HRM, shows the work organization
practices in LM. JIT changes the previously existing work
environment so that the importance of proper human resource
management increases. As both JIT and TQM rely on the concept
of teams, the involvement of employees is necessary for efcient
operations (Forza, 1996). Previous empirical research supported
the idea that HR practices contribute most when they are
implemented in bundles and integrated with manufacturing
policies. Plants that bundled HR practices with manufacturing
practices outperformed those that were not doing this. As such,
HRM supported both JIT and TQM (Flynn et al., 1995; Macdufe,
1995). See Fig. 2 for a visual representation of the practices in
question.

2.3. Inventory outcomes of lean manufacturing


Manufacturing performance is related to a combination of
practices; hence, several performance measures can be used
efciently. The most typical measures are rejects and scrap,
reworking, labor and machine productivity, product quality,
inventory levels and turnover, unit manufacturing cost, manufacturing cycle time, delivery speed and reliability (De Toni and
Tonchia, 1994; Flynn et al., 1995; Lowe et al., 1997; White et al.,
1999; Shah and Ward, 2003; Vastag and Whybark, 2005).
Of these measures, we can emphasize inventory turnover as a
visible and concrete marker of world-class performance and also as
an indicator of effort. However, according to Schonberger, (2003)
only 34% of 1000 studied world-class manufacturing rms were able
to increase inventory turnover for at least 10 years, manufacturing
performance is often most heavily weighted by inventory turnover
ratio. This interesting fact shows that the change in time of
inventory turnover is not that trivial (Sakakibara et al., 1997).
Higher inventory turnover means that the company has to
invest less capital in raw materials (RM), work-in-process (WIP)
or nished goods (FG). Certainly, reducing the amount of working
capital frees up loans or makes additional investments possible.
One of the fundamental goals of LM is to eliminate excess
inventories as a form of waste. Other sources of waste also affect
the level and turnover of inventories. Overproduction, for
example, means that the company produces more products than
expected, which results in high FG inventories that spend a long
time in the warehouse or might never be sold. Faulty products can
result in useless materials, waiting for processing leads to more
WIP, and unnecessary transportation between working stations or
plants also increases inventory. Thus, it seems obvious that
eliminating wastes can result in higher inventory turnover, or in
other words, a shorter time spent in the form of inventories.
As we mentioned earlier, lean practices used in LM consist of
four bundles. Based on those bundles, the effects of TQM and JIT
practices on inventory turnover were more exhaustively researched. Companies observed signicant improvements in lead
time, delivery cycles, productivity and quality levels, rejection
rates, and customer satisfaction; there was substantial reduction
in stocks of FG and WIP (Sohal and Egglestone, 1994; Flynn et al.,
1995; Lowe et al., 1997; Sriparavastu and Gupta, 1997).

2.4. Contingency factors and lean practices


The role of contingency factors is becoming progressively more
important in operations management. Previous studies examined
factors such as size, capacity utilization, process type (volume/
variety, degree of customization), product type, unionization,
plant age or industry (e.g., see Crawford et al., 1988; Sriparavastu
and Gupta, 1997; Cua et al., 2001; Shah and Ward, 2003).
Unionization and plant age were found not to be as important as

Fig. 2. The bundles of lean manufacturing.

K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

common wisdom would suggest (Shah and Ward, 2003). Size and
process type seem to be much more important when dealing with
rms in the manufacturing industry. A higher level of manufacturing performance was found in larger rms, with lower levels of
utilization and greater process orientation (Cua et al., 2001). In
addition, the choice of industry can signicantly affect the results
of the research. Because of this, the applied methodology should
be chosen carefully to avoid bias towards certain industrial
sectors and to help researchers grasp the essence of the industries
examined (Davies and Kochbar, 2002).
Size is the contingency factor that we investigated thoroughly.
The proper distinction between small and large rms varies from
article to article, but the most common delineation is 250500
employees. Differences in size mean different problems for small
and large rms. Small rms lack clout with suppliers; their
production schedules are less stable. They require extensive
training in order to implement lean practices but often do not
have the sufcient nancial resources for this task. Their
organizational structure is less formalized and contains fewer
levels, which inuences factors such as intra-rm methods of
communication (White et al., 1999).
Differences in size have two consequences. First, large
manufacturers are more likely to implement lean practices than
are small ones (Lowe et al., 1997; White et al., 1999; Shah and
Ward, 2003). Second, though small rms may also implement
critical elements of LM, the applied practices will, to some extent,
be different than the practices in large rms. One characteristic
distinction is the use of multifunctional workers. Small companies
cannot afford to employ different workers for every single task, so
workers with multifunctional skills will be more welcome (Inman
and Mehra, 1990; White et al., 1999; Shah and Ward, 2003).
We used ve contingency factors during our research. The rst
was presented by the data, as the survey was designed for
companies operating in the high-tech industry (ISIR 2835).
Hence, our ndings are valid in this industrial context. The second
factor was size, which was used as a fundamental factor during
the classication of the rms (see in Point 4 below). The
remaining three factors were the production system, type of
order and type of product. These contingencies are vital for a
manufacturing rm and have also been researched previously to a
certain extent. Nevertheless, the relationship between these three
factors and inventory turnover has not been addressed.
Now we are able to formulate our propositions and research
model (Fig. 3):
Proposition 1: Companies that use LM practices to a greater
extent have lower levels of inventory than do companies that use
LM practices less. From now on, we call the companies in the rst
group lean companies and the companies in the second group
traditional companies.
Proposition 2: Inventory turnover is higher in lean companies
that use line production systems (cellular layout or dedicated
line) to a greater extent.

157

Proposition 3: Lean companies with make to order (MTO) and


assemble to order (ATO) processes are better off in terms of their
inventory turnover than are engineering to order (ETO) or make to
stock (MTS) companies.
Proposition 4: Producing in batches in lean companies results
in higher inventory turnover than does one-of-a-kind or mass
production.

3. The survey
We have used IMSS (the International Manufacturing Strategy
Survey) data for our analyses. IMSS is a global network of
researchers with the objective of studying international manufacturing strategies, their implementation, and resulting performance in operations and related areas, such as supply chain
management and new product development.
In IMSS, data are collected by national research groups using a
standard questionnaire developed by a panel of experts and using
the previous editions of the research. The questionnaire is
translated, if necessary, into local languages by OM professors.
Although there is a suggested method of collecting data (including
focusing on better companies; searching for companies by mail
and/or phone; sending out the questionnaire to one contact
person per company, usually a plant or manufacturing manager,
in printed form; following up to help and inspire each contact
person to ll out the questionnaire), it is up to the national
research team to make decisions regarding this procedure.
For further details regarding the survey, see the summary book
on IMSS-I (Lindberg et al., 1998)or any of the articles that used
data from previous rounds of the survey (e.g., Frohlich and
Westbrook, 2001; Acur et al., 2003; Husseini and OBrien, 2004;
Laugen et al., 2005, Cagliano et al., 2006).
The IMSS-IV data bank, the one we use in this paper, extends to
711 valid observations from 23 countries from the period
between 2005 February and 2006 March. Altogether, we sent
questionnaires to 4251 companies, yielding a response rate of 17%
including valid answers only.
Industries are not represented for each country in the sample.
Nevertheless, even the smallest industry sample (manufacture of
ofce, accounting and computing machinery, with 16 observations) draws from 8 countries.
The industry and country characteristics of the database can be
seen in Tables 1 and 2.

4. Methodology
Our main goal was to ascertain how lean practices affect
inventories. In order to investigate this effect, we rst had to
classify the companies as traditional or lean. For this division, we
used the k-means cluster method based on six sets of LM

Fig. 3. The research model.

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K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

Table 1
Number of observations in various industries in the survey.
Manufacture of

Table 3
Cluster means of the manufacturing practices in traditional and lean companies.
Observations

Fabricated metal products


270
Machinery and equipment
146
Ofce, accounting and computing machinery
16
Electrical machinery and apparatus
92
Radio, television and communication equipment and
39
apparatus
Medical, precision and optical instruments, watches and clocks 29
Motor vehicles, trailers and semi-trailers
68
Other transport equipment
41
Missing
10

Table 2
Geographic distribution of the participating rms.
Countries

Valid answers

Argentina
Australia
Belgium
Brazil
Canada
China
Denmark
Estonia
Germany
Greece
Hungary
Ireland
Israel
Italy
New Zealand
Netherlands
Norway
Portugal
Sweden
Turkey
UK
USA
Venezuela
Total average

44
14
32
16
25
38
36
21
18
13
54
15
20
45
30
63
17
10
82
35
17
36
30
31

practices: (a) process focus, (b) pull production, (c) quality


programs, (d) increase in equipment efciency, (e) form of lean
organization and (f) continuous improvement. For the exact
questions, please refer to Questions 1-3 in the Appendix. It can be
seen that these sets of practices cover the four bundles we
discussed in the literature review; hence, they can serve as a basis
for differentiating between traditional and lean companies. We
expect that the companies in the lean companies cluster use these
sets of practices more intensely than do traditional companies,
thus earning a higher average score for these sets of practices.
Cluster means for the selected items for traditional and lean
companies are summarized in Table 3.
We call the two groups in question, traditional companies and
lean companies. The group of traditional companies contained
280 companies, while the lean group contained 330 companies
(101 companies did not answer the relevant questions and were
omitted).
Based on the literature previously discussed, LM is usually
used in large companies. As there are usually signicant
differences among companies of different sizes in the use of
various manufacturing practices (Demeter and Matyusz, 2008),
we decided to check the effect of size (based on the number of
employees, using the EU standard of 250 employees to create the
distinction between small- and medium-sized enterprises (SMEs)
and large companies). The results can be seen in Table 4.

Variables (15 scale)

Traditional

Lean

F-value (p)

Process focus
Pull production
Quality programs
Increase of equipment efciency
Form of lean organization
Continuous improvement

2.64
2.19
2.45
2.17
2.18
2.11

3.90
3.46
3.64
3.44
3.29
3.57

258
248
275
305
202
412

(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)

Table 4
Relation of company size and leanness.
Type/size

SME

Large

Total

Traditional
Lean
Total

196
159
355

84
171
255

280
330
610

Table 5
Performance measures of traditional and lean companies in small and large
companies.
Traditional

Lean

F-test

Small companies
Ratio for JIT delivery from suppliers
Ratio for JIT delivery to customers
Throughput time efciency
Late delivery
Scrap and rework costs

36.1
47.0
53.5
10.1
3.59

42.8
53.1
49.6
10.9
3.98

3.2
1.9
1.0
0.2
0.3

0.077
0.169
0.309
0.666
0.595

Large companies
Ratio for JIT delivery from suppliers
Ratio for JIT delivery to customers
Throughput time efciency
Late delivery
Scrap and rework costs

26.1
37.1
38.6
8.46
3.03

40.5
55.4
48.7
8.65
3.26

9.4
11.5
3.9
0.0
0.1

0.002
0.001
0.049
0.918
0.713

Although there are many SMEs that can be considered lean


according to our criteria, there is a clear tendency to use lean
practices more intensively among larger companies. The Chi-test
of the size effect (that is, the trend stipulating that it is more
possible to nd lean companies among large rms) is signicant
at any level (Chi-value= 29.6, p = 0.000). Thus, in order to see if
small companies in the lean group really are lean companies, we
collected some measures from the survey that, according to the
literature review, count as typical lean measures. Such measures
are, for example, the ratio for JIT delivery from suppliers, the ratio
for JIT delivery to customers, throughput time efciency, late
delivery, and scrap and rework costs (see Questions 46 in the
Appendix). Small lean companies should be at least as highperforming in terms of these measures as their traditional
competitors. If this does not hold, then our selection criteria for
separating the two groups are wrong. We also checked these
criteria for large companies. The differences are summarized in
Table 5.
For the most typical lean measures (JIT deliveries, throughput
time efciency) large lean companies perform signicantly better
(at the p = 0.05 level) than do traditional companies, while in
terms of reliability and quality, they are not worse than the
others. On the other hand, we did not nd any signicant
difference between small lean and traditional companies in the
examined performance measures. Thus, following the literature
and our results, we decided that our analysis would only include
large companies. This meant that we had 255 companies to

K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

compare, of which 84 were traditional and 171 were lean


companies.

5. Analysis and results


5.1. LM practices and inventory turnover (Proposition 1)
Our main research question was how LM practices affect
inventory turnover. The survey asked about the inventories in
terms of number of production days (see Question 7 in the
Appendix). Unfortunately, this scaling caused difculty in calculating inventory turnover in the usual way (365/inventory days).
Several companies indicated that they have inventory that spans
zero days, but the real inventory level could be anywhere
between zero and one day. We chose not to replace these
answers with some arbitrary average number, as a very small
change in the number would cause a huge change in inventory
turnover (e.g., a 12-hour inventory would mean a yearly
inventory turnover of 730, while a 6-hour inventory would mean
a turnover of 1460). Therefore, we decided to use inventory day
data to characterize inventory turnover. We used correlation
analysis for this purpose. The results can be seen in Table 6.
On the basis of Table 6, our proposition is supported. Each type
of inventory turns faster at large lean companies than at large
traditional ones. The greatest differences are on the supply and
customer sides of the rm, even though our criteria for separation
have been based on the internal manufacturing characteristics of
companies (production control, quality, human practices). Nevertheless, the work-in-process (WIP) inventory based on production
days is also lower for lean companies.
5.2. Contingency factors and inventories
Each company is different, however, in the nature of the
demand it experiences and in the production system it uses to
satisfy its customers, even if they all use lean practices. Therefore,
the important question is how efcient lean practices can be if the
conditions are not ideal for their use. We examine this question
in the following analyses. From now on, we will inspect only large
lean companies and try to nd the relationship between the
Table 6
LM practices and inventory days.
Inventory days

Traditional

Lean

F-test

Raw material inventory


days of production
Work in process
inventory days of
production
Finished product
inventory days of
production

38.6

24.8

11.58

0.001

22.8

15.1

4.37

0.038

25.4

13.5

9.67

0.002

159

various contingency factors (production system, order type,


product type) and corporate inventories.
5.2.1. The role of production systems (Proposition 2; see Question 8
in the Appendix)
LM practices usually t with line production systems; they are
not really applicable to job shop environments. Therefore, it is
more usual to apply line production (cellular layout or dedicated
lines) to LM environments, and inventory turnover is expected to
be higher with line production than with job shops. The results
can be seen in Table 7.
The results do not contradict our proposition. The most typical
production system in lean companies is the dedicated line, but the
other two types also can be identied. The type of production
system itself, however, relates signicantly only to WIP inventories. The higher the ratio of dedicated lines in companies, the
smaller the level of WIP inventories. This is the only type of
production, however, that results in a reduced number of WIP
inventory days. Both cellular layout and job shops increase its
level, the latter signicantly.
5.2.2. The role of order type (Proposition 3; see Question 9 in the
Appendix)
One of the objectives of LM is to improve lead times and
responsiveness to customer orders. Thus, lean companies can
easily handle make to order (MTO) situations, and we expect to
nd MTO and assembly to order (ATO) to be the most typical
methods of order fullment. Make to stock (MTS) processes
should be occurring at a much lower level due to the aim of
eliminating waste; this includes nished goods (FG) inventories
without customer orders. In addition, engineering to order (ETO)
might result in excessive delays in response time. Results can be
seen in Table 8.
In two-thirds of situations, the products are manufactured or
assembled to order. The relationship between order type and
inventory is, however, very fuzzy. In the ETO situation, as
production is preceded by product development, raw material
(RM) is ordered only after the design is accepted by the customer
and after production, the FG goes directly to the customer. As a
result, the level of RM and FGs can be reduced, which might be the
reason for the negative relationship exhibited in Table 8. The
specic designs, however, do not make routine work possible in
production; the products have to spend more time in the
production system than does a mass product on an assembly
line. Thus, the higher the ratio of engineered to order products,
the higher the amount of work in production process days.
Manufactured-to-order products require some RM if they are to
be responsive enough to customer orders. However, as in the case
of all other order types where the customer is known, the
relationship between FG production days and order type is
negative: the higher the ratio of the given order type (engineered/manufactured/assembled to order) to the total amount
of orders, the lower is the level of FG inventories. Production to
stock is quite the opposite in this sense. The more standard the

Table 7
Production system and its relation to inventory days.
Job shop
Variable average (%)

18.4

Cellular layout
32.0

Dedicated line
49.6

Correlations (signicance)
Raw material days of production
Work in process days of production
Finished goods days of production

0.104 (0.198)
0.228 (0.004)
0.064 (0.425)

0.021 (0.796)
0.102 (0.207)
0.117 (0.147)

0.061 (0.448)
0.262 (0.001)
0.151 (0.061)

160

K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

Table 8
Type of order and its relation to inventory days.
Engineered to order
Variable average (%)

14.2

Manufactured to order

Assembled to order

44.8

23.5

Produced to stock
17.5

Correlations (signicance in brackets)


Raw material days of production
Work in process days of production
Finished goods days of production

0.020 (0.806)
0.104 (0.190)
0.010 (0.905)

0.066 (0.041)
0.001 (0.991)
0.091 (0.258)

0.162 (0.041)
0.054 (0.500)
0.132 (0.099)

0.120 (0.131)
0.029 (0.718)
0.301 (0.000)

Table 9
Number of products and its relation to inventory days.
One of a kind
Variable average (%)

Batch

23.4

46.4

Mass
30.2

Correlations (signicance in brackets)


Raw material days of production
Work in process days of production
Finished goods days of production

0.079 (0.320)
0.045 (0.573)
0.153 (0.055)

product, the lower the level of WIP inventories, although the


relationship itself is not signicant.
Altogether, there are three signicant relationships between
inventory days and order type. MTO is positively related to RM
inventory days, but ATO is negatively linked with it. The
latter might be true because some preliminary steps have
already been done on the products so that they are already in a
WIP form, not RM form. This kind of preliminary work is not
characteristic in MTO situations. There is a very strong positive
relation between the FG inventories and produced to stock
situations. The higher the ratio of MTS, the more time FGs spend
in inventory.
Looking at the total effect of order type on inventories, one
sees that the best alternative seems to be ATO, where all types of
inventories spend less time at the company.
5.2.3. The role of product type (Proposition 4; see Question 10 in the
Appendix)
Smaller batch size, ideally a batch size of one, is the objective
of LM. This does not mean, however, that the goal is one-of-a-kind
production. It does mean that companies can produce several
kinds of products in smaller or larger batches. The most typical
size is a batch, with one-of-a-kind or mass production less often
used. The results can be seen in Table 9.
Although the direction of relationship between the type of
product and inventory days is the most promising in mass
production, there is no signicant relationship between the type
of product and inventory days.

6. Discussion
LM seems to be a powerful tool for managing inventory
turnover. Companies that implement lean practices in manufacturing have signicantly better inventory turnover for each type
of inventory (RM, WIP and FG) than do traditional companies.
Although this result is quite intuitive, not much research supports
these facts empirically (Oliver et al., 1996; Schonberger, 2003;
Sohal and Egglestone, 1994).
However, even if LM is suggested to be a panacea in several
industries and services today, according to our results, its impact

0.005 (0.949)
0.074 (0.352)
0.119 (0.137)

0.076 (0.338)
0.116 (0.146)
0.012 (0.883)

can be very different in various contexts (Cua et al, 2001; Davies


and Kochbar, 2002; Shah and Ward, 2003; White et al, 1999). The
type of production system has the most signicant impact on
inventory turnoverin particular, on WIP inventories. The second
most signicant is the ordering policy applied, which primarily
affects inow and outow inventories. Finally, product type, or
the mass nature of the product (one-of-a-kind, batch or mass)
itself does not seem to directly inuence inventory turnover. The
latter does not necessarily mean, however, that there is not an
indirect relationship between product type and inventory turnover.
If we think about the product-process matrix, then our results
suggest that there is a mismatch between products and processes:
we found direct relationships between processes and inventories
but no relationship between products and inventories.
Classical LM uses a cellular layout in order to maintain the
exibility of production while improving resource utilization
(Chase et al, 2006). Nevertheless, the most popular type of
production among lean companies in our sample is dedicated line
product. If we set aside the literature, this result seems understandable. Line production necessarily requires a smaller WIP
inventory, as the product types and, thus, components are fewer
and the ow is more continuous. Since we investigated large
companies, they might have large enough demand to justify
dedicated lines instead of manufacturing cells. Indeed, this seems
appropriate if, as indicated by our results, dedicated lines work
with the highest WIP inventory turnover as compared to job
shops or cellular layout. That is, if we want to reduce WIP
inventory, then the best option is to use dedicated lines (higher
inventory turnover) and the worst one is to work in job shops
(lower inventory turnover). Cellular manufacturing does not have
any signicant inuence on inventory turnover. What are the
managerial implications of these results? If we have several
products that can be organized in product families and thus in
manufacturing cells, then we can avoid the negative consequences of job shops by organizing manufacturing cells for the
same portfolio of products. However, if the volume is large
enough, then it is worthwhile to go further and build dedicated
lines for products. Of course, our logic is valid only from the
inventory turnover point of view, as we did not analyze other
performance measures.

K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

Another contingency that we investigated is the ordering


policy used. As one of the objectives of LM is to reduce lead times
and thus produce exactly what the customer wants (pull), the
most frequent ordering policy is MTO. However, very few
companies have such a short lead time that they start the whole
production process only when the customer order takes place.
Thus, many lean companies put the decoupling point closer to the
customer and do some preliminary production. The other two
policies (ETO and MTS) are less frequent in lean companies (Chase
et al, 2006).
While the type of production system inuences WIP inventories the most, the ordering policy impacts RM and FGs the most
in lean companies. Looking at the behavior of inventory turnover
under various ordering policies, one sees that the best policy is
ATO, which signicantly increases RM inventory turnover and
also reduces FG inventories (although the signicance level is very
weak). This means that ATO systems can work from the lower
level of inventories and deliver FG to customers as soon as
possible. This result does not necessarily come from the ordering
policy itself. ATO policy is usually connected to a standardized
product portfolio, where product customization takes place only
in the last stages of production, so the number of components is
relatively low compared to the type of products produced.
Although MTO policy does not seem to be very dissimilar to
ATO, its impact on inventory turnover is just the opposite. In MTO
environments, companies have to preserve a wide portfolio of RM
in order to satisfy incoming customer orders as soon as possible,
as in MTO, the delivery time is usually a critical performance
indicator. ETO, on the other hand, usually allows longer lead times
for companies, and while development processes are taking place,
the purchasing processes can be executed. As a result, the level of
RM inventory is lower than for MTO. Finally, MTS requires by far
the highest level of FG inventories, as these enterprises have to be
ready to full any order from stock by denition. The most
important point that we can glean from this analysis is that
standardizing products and postponing product proliferation is
worthwhile if we want to increase RM inventory turnover.
The third contingency examined is the mass character of
products. We expected that, in an LM environment, batch
production would be the method most often employed, but that,
in the case of large demand, mass production would also be
possible. This expectation was valid; however, the mass character
of the products only had one signicant impact on inventory
turnover. The exception emerged for one-of-a-kind products,
which are weakly correlated with FG inventories. This is quite
understandable, as producing items one-by-one means we know
exactly for whom we are producing the given product, so that it is
usually delivered to the customer right after it is nished.
Altogether, the results we have can be easily explained and t
the logic of LM. We consider it an important contribution,
however, that the contingencies we found seem to have a very
clear impact on the various forms of inventories. The production
system affects the level of WIP inventories, while the ordering
policy used affects the RM and FG inventories. As a result, if
companies want to improve their inventory turnover, they have to
know which type of inventory they want to address in order to
nd the right step to take.

161

Concerning contingency factors, we found that different types


of inventories are sensitive to different contingency factors. WIP is
affected strongly by the production system, while RM and FG are
affected by the type of order. This link further emphasizes the
importance of proper decoupling point placement in the supply
chain. Product type, however, does not inuence the efciency of
inventory management. It is important to note that if we focus on
inventory turnover, cellular manufacturing may not be the best
facility layout (though this layout is widely regarded as the one
that suits LM best).
One limitation of our paper is the industrial context. The IMSSIV survey was distributed to companies in the high-tech industry
(ISIR 28-35), so our results can be fully applied only within these
industries.
In further research, it may worth examining the differences
among the individual industries of the ISIR 2835 industries. In
addition, our model could be extended to include other business
performance indicators. In this way, we could see whether there is
a direct relationship between inventory turnover and business
performance or whether this effect is not that strong in itself.
Another possible method of further research would be to verify
whether a product-process mismatch does really exist at such
companies. As we mentioned in the Discussion section, we found
a relationship between the processes and inventories we
examined, but there was no relationship between the product
types and inventories. This may have been caused by some kind of
product-process mismatch, in which case this question should be
addressed.

Acknowledgement
This research was supported by the Hungarian Scientic
Research Fund (OTKA T 76233) and the Janos Bolyai Research
Fellowship Program.

Appendix A. Original questions from the survey


Q1Q3. Indicate degree of the following action programs
undertaken over the last three years and planned efforts for the
coming three years (Table A1).
Q4. What proportion of your raw materials and components
are delivered to you Just-In-Time? _________%.
Q5. What proportion of your end products do you deliver JustIn-Time? _________%.
Q6. What is the current performance level on the following
dimensions?

 Throughput Time Efciency (dened as the time the products





are worked on as a % of the total manufacturing lead timei.e.,


start of rst operation to nish of last operation)? _______%.
Late deliveries to customers (as percentage of orders delivered)? _______%.
Scrap and rework costs (as percentage of sales)._______%.

Q7. How many days of production (on average) do you carry in


the following inventories:

7. Conclusions and further research

 _______ Raw material/components _______ Work-in-process


We can draw several conclusions from this analysis. First, we
found a signicant relationship between LM practices and
inventory turnover. Lean companies keep fewer inventories of
any type. In addition, LM practices were mostly applied in
environments described in lean theory.

_______ Finished goods


Q8. To what extent are your manufacturing activities organized
in the following layout categories: (indicate percentage of total
volume) (Table A1).

162

K. Demeter, Z. Matyusz / Int. J. Production Economics 133 (2011) 154163

Table A1
Q1Q3 indicate degree of the following action programs undertaken over the last three years and planned efforts for the coming three years.
Degree of use last 3 years
None
Q1 group

1?2?3?4?5
1?2?3?4?5

Q2 group

1?2?3?4?5
1?2?3?4?5

Q3 group

1?2?3?4?5
1?2?3?4?5

High
Restructuring manufacturing processes and layout to obtain process focus and streamlining (e.g.,
reorganize plant-within -a-plant; cellular layout, etc.)
Undertaking actions to implement pull production (e.g., reducing batches, setup time, using kanban
systems, etc.)
Undertaking programs for quality improvement and control (e.g., TQM programs, 6s projects, quality
circles, etc.)
Undertaking programs for the improvement of your equipment productivity (e.g., Total Productive
Maintenance programs)
Implementing the Lean Organisation Model by e.g., reducing the number of levels and broadening the
span of control
Implementing Continuous Improvement Programs through systematic initiatives (e.g., kaizen,
improvement teams, etc.)

Table A1
Q8. To what extent are your manufacturing activities organized in the following
layout categories: (indicate percentage of total volume).
Process layout
Job shop
Cellular layouta
Dedicated lines

_____%
_____%
_____%
100%

a
Note: A cell is a grouping of equipment dedicated to support the
production of families of parts sharing similar process operations.

Table A1
Q9. What proportion of your customer orders are (NB: the percentages should add
up to 100%).
Customer orders
Designed/engineered to order
Manufactured to order
Assembled to order
Produced to stock

_____%
_____%
_____%
_____%
100%

Table A1
Q10. To what extent do you use one of the following process types (percentage of
total volume)? (NB: percentages should add up to 100%).
Process type
One of a kind production
Batch production
Mass production

_____%
_____%
_____%
100%

Note: A cell is a grouping of equipment dedicated to support


the production of families of parts sharing similar process
operations.
Q9. What proportion of your customer orders are (NB: the
percentages should add up to 100%): (Table A1).
Q10. To what extent do you use one of the following process
types (percentage of total volume)? (NB: percentages should add
up to 100%) (Table A1).

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